CONTINUOUS DEVELOPMENT OR CONTINUOUS PROBLEMS?
TRICKS AND TRAPS IN CONTINUOUS DEVELOPMENT PROVISIONS
Lisa Vaughn Lumley
Shannon, Gracey, Ratliff & Miller, LLP
Fort Worth, Texas
In the modern era of mineral leasing,
continuous development provisions are
found in nearly every oil and gas lease, but
can present some surprising challenges.
This article discusses some of the
difficulties with drafting, enforcing, and
applying continuous development provisions
to preserve mineral leases past the primary
I. What Are Continuous Development
Provisions, and Why Do We Have
Oil and gas leases are comprised of
primary and secondary terms. The primary
term is a specified length of time; a term
spanning three to five years is most
common, although it can be shorter or
longer. The vast majority of modern leases
remain in effect during the primary term
regardless of whether oil or gas is produced
or whether drilling and exploration has
occurred. That changes after the primary
term expires: during the secondary term, the
lease remains in effect only so long as there
is production of minerals in paying
quantities or a “savings clause” creates a
substitute for production in order to
perpetuate the lease.
This article focuses on only one such
savings clause: the “continuous
See Natural Gas Pipeline Co. of Am. v. Pool,
124 S.W.3d 188, 192 (Tex. 2003) (observing
that oil and gas lease is a grant of a determinable fee); Watson v. Rochmill, 155 S.W.2d 783,
784 (Tex. 1941) (noting the well settled and
strict rule that, after the primary term, a lease
automatically terminates upon cessation of production); Clifton v. Koontz, 325 S.W.2d 684,
690–91 (Tex. 1959) (applying the rule to a lease
containing a 60-day termination clause).
development” provision. Continuous
development provisions can be called by
other names, such as “continuous drilling,”
“continuous operations,” or sometimes
“retained acreage” or “dry hole” clauses.
Regardless of the name, such clauses keep
a nonproductive lease in effect into, or
during, the secondary term as long as the
lessee is conducting qualified activities
within the specified periods of times.
Continuous development provisions are
typically created for three reasons: (i) to
permit a lessee to complete wells begun
during the primary term; (ii) as a savingsclause mechanism to continue a lease past
its primary term even if there is no
production; and (iii) to give a lessee
additional and specific incentive to fully
develop a lease in addition to the bare
“implied” duties of development that usually
require litigation to enforce.
Continuous development provisions
take a variety of forms. Examples taken
from a random sample of leases follow:
1. The “Producers 88”: The predominant form of oil and gas lease is referred to
as the “Producers 88,” but as there is no
true standard, even leases identically
named will nearly always have differences.
One version of a Producers 88 continuous
development provision is as follows:
If, at the expiration of the primary term
of this lease, oil or gas is not being
produced on the leased premises or on
These examples, taken from leases that have
crossed the author’s desk in the past several
years, are meant only as illustrations. They are
not endorsed as particularly good nor
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acreage pooled therewith but Lessee is then
engaged in drilling or re-working operations
thereon, then this lease shall continue in
force so long as operations are being
continuously prosecuted on the leased
premises or on acreage pooled therewith;
and operations shall be considered to be
continuously prosecuted if not more than
one hundred eighty (180) days shall elapse
between the completion or abandonment of
one well and the beginning of operations for
the drilling of a subsequent well. If after
discovery of oil or gas on said land or on
acreage pooled therewith, the production
thereof should cease from any cause after
the primary term, this lease shall not
terminate if Lessee commences additional
drilling or re-working operations within one
hundred eighty (180) days from the date of
cessation of production or from the date of
completion of a dry hole. If oil or gas shall
be discovered and produced as a result of
such operations at or after the expiration of
the primary term of this lease, this lease
shall continue in force so long as oil or gas
is produced from the leased premises or on
acreage pooled therewith.
2. Another sample from a current Texas lease:
Continuous Drilling Operations. If
Lessee drills a well which is incapable of
producing in paying quantities (a "dry hole")
on the leased premises or land pooled
therewith, or if all production (whether or not
in paying quantities) permanently ceases
from any cause, including a revision of unitboundaries pursuant to the provisions of
Section 6 or the action of any governmental
authority, then, in the event this Lease is not
otherwise being maintained in force it shall
nevertheless remain in force if Lessee
commences operations for reworking an
existing well or for drilling an additional well
or for otherwise obtaining or restoring
production on the leased premises or land
pooled therewith within ninety (90) days
after completion of operations on such dry
hole or within ninety (90) days after such
cessation of all production. If at the end of
the primary term, or at any time thereafter,
this Lease is not otherwise being
maintained in force but Lessee is then
engaged in drilling, reworking or any other
operations reasonably calculated to obtain
or restore production therefrom, this Lease
shall remain in force so long as any one or
more of such operations are prosecuted
with no cessation of more than ninety (90)
consecutive days, and if any such
operations result in the production of oil or
gas or other substances covered hereby, as
long thereafter as there is production in
paying quantities from the leased premises
or lands pooled therewith.
3. Another example from a Texas
This lease shall continue in full force
and effect beyond the expiration of the
Primary Term so long as Lessee has
complied with the following continuous
development program: (a) During the
Primary Term Lessee may commence the
drilling of a well to a depth of at least 6,000
feet. (b) If the well described in clause (a)
above was commenced during the Primary
Term but not completed during the Primary
Term (either as a well capable of producing
oil or gas in paying quantifies or as a dry
hole), then at the end of the Primary Term
Lessee must be engaged in drilling or
completing such well with no cessation of
more than sixty (60) consecutive days. (c) If
a well was completed during the Primary
Term (either as a well capable of producing
oil or gas in paying quantities or as a dry
hole), or if Lessee complied with the
requirements of clause (b) above, Lessee
may continue this lease in full force and
effect as to all of the acreage described on
Exhibit A by commencement of the drilling,
deepening or re-working (the term "reworking" shall include, without limitation, the
re-entry of an abandoned or temporarily
abandoned well bore) of a well within the
Continuous Development Period following
the later of (A) the end of the Primary Term,
or (B) the date of completion of drilling,
deepening or re-working of the last well that
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Lessee. Lessee may drill, deepen or rework any number of subsequent wells and
maintain this lease in full force and effect
provided that Lessee complies with the time
requirements specified in this Section 6 by
commencing the drilling, deepening or reworking of a well within the Continuous
Development Period beginning on the date
of completion of the prior well that was
drilled, deepened or re-worked. Failure to
commence drilling, deepening or re-working
such additional well or wells within the time
herein provided shall terminate this
Agreement ipso facto as to all lands, save
and except those lands included within the
surface boundaries of a "production unit"
(as such term is hereafter defined in Section
15 hereof) within which oil or gas is being
produced in paying quantities and this lease
shall continue as to the lands within such
production units for so long as oil or gas is
being produced in paying quantities.
4. A final example of a continuous development provision:
Anything in this lease to the contrary
notwithstanding, it is understood and agreed
that this lease shall terminate at the
expiration of the primary term as to all
lands, except for those in a production unit
as defined herein, unless Lessee is then
engaged in drilling operations on or
including said land or, within the 60-day
period preceding the expiration of the
primary term, Lessee shall have completed
or abandoned a well drilled on this lease or
on a unit including said land. In either of
such events, this lease shall continue in
force as to all lands held under this lease at
the expiration of such primary term, only so
long as Lessee is engaged in continuous
drilling operations on said land, and drilling
operations shall be deemed continuous if
not more than sixty (60) days elapse
between the completion or abandonment of
one well and the commencement of drilling
operations for another well. At the
expiration of the primary term unless the
continuous drilling provisions specified
above in this subparagraph shall then be
applicable, or at such later date as Lessee
shall fail to continuously drill this lease
within the 60-day time periods specified
above for continuous drilling operations in
effect at the end of the primary term, this
lease shall terminate except as follows:
(1) If Lessee has completed a well on
said land which is classified as an oil well by
the appropriate state or other governmental
regulatory agency or commission having
jurisdiction and is producing oil in
commercial quantities, then this lease shall
continue in effect as to a tract of land
containing the number of acres around each
such oil well as set forth in Section 4 hereof;
(2) If Lessee has completed a well on
said land which is classified as a gas well by
the appropriate state or other governmental
regulatory agency or commission having
jurisdiction and is producing gas in
commercial quantities, or is capable of
producing gas in commercial quantities with
all shut-in payments provided herein having
been paid thereon, then this lease shall
continue in effect as to a tract of land
containing the number of acres around each
such gas well as set forth in Section 4
hereof . . . .
II. Why Are Continuous Development
Mineral leases are a grant of a fee
simple determinable in the mineral estate,
with a possibility of reverter in the lessor.
After the primary term, that reverter is
triggered by a failure of production, unless
there is a savings clause that substitutes for
Thus, if the savings clause
ceases to be effective, the lease terminates.
Pool, 124 S.W.3d at 192.
See Rochmill, 155 S.W.2d at 784 (noting
settled rule that after primary term, cessation of
production terminates lease); Jesse R. Pierce &
William R. Burns, Termination of Oil, Gas and
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The significance of that termination
cannot be overstated. Because mineral
leases are determinable fees, once the
determining event occurs (such as
cessation of production), the lease is
terminated and that termination cannot be
cured absent a signed writing from the
The best a lessee can hope for if it
appears the determining event has occurred
is that a court will find enough ambiguity in
the lease language so as to interpret away
whether the event has in fact occurred.
only other hope for a lessee facing such a
situation is for enough time to pass such
that adverse possession is possible; note,
however, that during the length of time
necessary for adverse possession, the
lessee may be considered a trespasser and
thus at risk for trespass damages.
Mineral Leases: Savings Clauses and Defensive
Doctrines (published by the State Bar of Texas
Annual Advanced Oil, Gas and Energy
Resources Law Course 2008) at p. 1.
See Anadarko Petroleum Corp. v. Thompson,
94 S.W.3d 550, 554 (Tex. 2002) (per curiam)
(noting a mineral lease “automatically
terminate[s] if the event upon which it is limited
occurs”); Rochmill, 155 S.W.2d at 785 (finding
that lessor’s silence after termination does not
recreate lease); Bradley v. Avery, 746 S.W.2d
341, 343 (Tex. App.—Austin 1988, no writ);
Hastings v. Pichinson, 370 S.W.2d 1, 4 (Tex.
Civ. App.—San Antonio 1963, no writ).
See, e.g., Thompson, 94 S.W.3d at 554 (noting
that a court will not interpret language to limit a
grant unless the language is “clear, precise, and
unequivocal”); Henshaw v. Texas Natural Res.
Found., 216 S.W.2d 566, 570 (Tex. 1959)
(stating a preference to interpret language so as
to prevent forfeiture).
See Barnes v. Mathias, 353 S.W.3d 760, 764
(Tex. 2011) (per curiam);; Cage Bros. v.
Whiteman, 163 S.W.2d 638, 642 (Tex. Comm’n
App. 1942); Gulf Prod. Co. v. Spear, 84 S.W.2d
452, 457 (Tex. Comm’n App. 1935); Right of
Way Oil Co. v. Gladys City Oil & Mfg. Co., 157
S.W. 737, 740 (Tex. 1913) (noting that
trespasser is liable for full value of produced
minerals unless trespass was good faith and
trespasser proves deductions for production
costs); Hunt v. HNG Oil Co., 791 S.W.2d 191,
193–94 (Tex. App.—Corpus Christi 1990, writ
Continuous development provisions are
powerful savings provisions, typically
permitting a lessee to preserve the lease as
to the entirety of the leased acreage for an
unlimited number of years regardless of
whether there is production, so long as
qualifying activities take place during the
specified time table. But along with that
power comes high risk: if compliance with
the continuous development provision is the
only mechanism perpetuating the lease,
even a minor failure to comply will result in
lease termination. Worse, that termination
can go undiscovered for years, during which
the lessee is spending untold thousands in
attempts to develop the lease, all of which
may be forfeited if a trespass is later found.
Other risks from a continuous
development provision are more subtle.
From the lessor’s perspective, compliance
with the provision can be difficult to monitor
and a poorly drafted provision can permit a
lazy operator to maintain the lease for
extended periods with minimal efforts at
exploration. From the lessee’s point of view,
repeated and frequent drilling is expensive
and can force faster development than
market or geologic conditions warrant.
III. Lurking Difficulties and Unintended
Consequences with Continuous
A. Ambiguous Terms
For the most part, the oil and gas
industry operates with forms borrowed from
someone else—such as the widely used socalled Producer’s 88—created by nonlawyers who may or may not be familiar with
case law and legal precedent. Those forms
use industry words whose meaning can
change from one usage to another and
denied); Mayfield v. de Benavides, 693 S.W.2d
500, 504, 506 (Tex. App.—San Antonio 1985,
writ ref’d n.r.e.); Aloysius W. Leopold, Texas
Practice: Land Title Examination, § 44.38 (3d
See Right of Way Oil Co., 157 S.W. at 740;
Hunt, 791 S.W.2d at 193–94.
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which are usually not defined in the lease.
Drafters tend to simply “build on” to previous
forms—adding new language and concepts
without full consideration of the ramifications
or effect on the existing provisions. All of
these problems seem to be magnified in
continuous development provisions. Some
of the potentially ambiguous terms that
populate continuous development
provisions are discussed below.
1. “Drilling” and “Operations.” Some
continuous development provisions require
“operations”; some require “drilling”; some
require “drilling operations”; and some
require “additional” or “subsequent”
Some provisions even require
“operations” in one part, but “drilling
operations” in another. What activities count
as “drilling,” “operations,” or “drilling
operations”? Courts have wrestled with
these terms and applied a fact-intensive
analysis to each action undertaken to
determine whether those actions, as a
whole, constitute the required “drilling” or
Typically, some sort of
physical activity on the premises is required
to constitute “operations,” but beyond that,
both commentators and courts have
struggled to harmonize the decisions
attempting to define these terms, and the
analysis is strongly influenced by subtle
differences in language.
Physical work such as engaging a
drilling contractor, surveying, staking the
well location, and leveling the pad site were
held to be sufficient to constitute
“operations” in Petersen v. Robinson Oil &
On the other hand, in Ridge Oil
Compare the continuous drilling provision
examples quoted above.
See Ridge Oil Co. v. Guinn Invs., Inc., 148
S.W.3d 143, 158–59 (Tex. 2004); Pardue v.
Mark, 279 S.W.2d 594, 596 (Tex. Civ. App.—
Fort Worth 1955, no writ) (recognizing that the
issue is one of “reasonable diligence in
Petersen v. Robinson Oil & Gas Co., 356
S.W.2d 217, 220 (Tex. Civ. App.—Houston
[Galveston] 1962, no writ). See also Terry v.
Co. v. Guinn Invs., Inc., the Texas Supreme
Court, referring to the Fort Worth Court of
Appeals’ reasonable diligence standard
expressed in Pardue v. Mark, held that even
some manual operations and other prep
work did not qualify as “operations”:
Even assuming that the
stake was driven into the well
site during this interval, and
taking into account the fact
that [the lessee] obtained a
drilling permit . . . , and was
attempting to pay surface
damages, this does not raise
a fact question as to whether
‘operations were being carried on’ sufficient to sustain
Similarly, the Amarillo Court of Appeals
has held that the term “additional
operations” means only those operations
reasonably intended to cause the well to
Such operations do not include
removing tubing from the well to a supply
house, selling junk tubing, cleaning up and
filling pits on the location with the use of a
backhoe, and hauling tubing and other
material from the well for storage.
of cases shows that sometimes nonproduction oriented physical activities such
as attempting to market minerals, flaring a
well, negotiating sales and other contracts,
Texas Co., 228 S.W. 1019, 1019–20 (Tex. Civ.
App.—Fort Worth 1920, no writ) (finding that
erection of timbers and movement of machinery
to the drilling site was deemed sufficient); Cox v.
Stowers, 786 S.W.2d 102, 105 (Tex. App.—
Amarillo 1990, no writ) (holding that physical
preparations for the well on the site, such as
selecting a well location, transporting material to
the well site, and digging a slush pit, were sufficient to constitute “drilling operations”).
Ridge Oil, 148 S.W.3d at 158.
Hydrocarbon Mgmt. v. Tracker Exploration,
Inc., 861 S.W.2d 427, 438 (Tex. App.—Amarillo
1993, no writ).
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and obtaining permits are held to not
In Veritas Energy, LLC v. Brayton
Operating Corporation, the lease broadly
defined “operations” as “drilling, testing,
completing, reworking, re-completing,
deepening, plugging back or repairing of a
well in a search for or in an endeavor to
obtain production of oil, gas, sulphur or
other minerals . . . whether or not in paying
Despite this broad definition,
the court concluded that physical surface
activities such as a backhoe delineating the
access road to the well site did not qualify
as “operations” sufficient to preserve the
lease because the lease definition was
aimed at drilling-specific activities, not
Determining which activities qualify also
requires knowing whether the activity must
be on a subsequent well, an additional well,
or the same well. In Rogers v. Osborn, the
continuous development provision did not
contain the word “additional” with respect to
As a result, the Texas Supreme
Court held that the operations required to
sustain the lease could only be on the
specific well on which operations were
being conducted at end of the primary term,
and not on an additional well commenced
after the primary term had expired.
There are two final warning
observations based on cases such as those
discussed above: first, if the activity required
to comply with the continuous drilling
provision is “drilling operations,” there is a
See Gulf Oil Corp. v. Reid, 337 S.W.2d 267,
272 (Tex. 1960); Hickey v. Spangler, 358
S.W.2d 216, 219 (Tex. Civ. App.—Texarkana
1962, writ ref’d n.r.e.).
Veritas Energy, LLC v. Brayton Operating
Corp., No. 13-06-061-CV, 2008 WL 384169, at
*1 (Tex. App.—Corpus Christi Feb. 14, 2008,
pet. denied) (mem. op.).
Id. at *5–6.
Rogers v. Osborn, 261 S.W.2d 311, 315 (Tex.
strong argument that fracking operations
would not satisfy the provision.
the provision requires “additional” or
“subsequent” wells, it is possible that
additional horizontal laterals would not
suffice. A careful drafter must consider
these possibilities; provisions that have not
addressed these issues expose the parties
2. “Commencement.” The term
“commencement,” particularly when used in
combination with “drilling,” can mean the
entry of a drill bit into the ground, the
determination the well bore entry point and
some on-the-ground work, the filing of a
permit, or some level of dirt work.
Additionally, problems can arise when a
lessee, trying to do the minimum to comply
with a continuous development provision,
begins drilling with a rig that is not capable
of reaching the depths needed to produce
or performs reworking operations it knows
Although these “place holder”
See Bruce M. Kramer, Keeping Leases Alive
in the Era of Horizontal Drilling and Hydraulic
Fracturing: Are the Old Workhorses (Shut-in,
Continuous Operations, and Pooling Provisions)
Up to the Task?, 49 Washburn L.J. 283, 301–02
(2010) (cautioning that hydraulic fracturing
should be explicitly listed in savings provisions);
Bargsley v. Pryor Petroleum Corp., 196 S.W.3d
823, 826 (Tex. App.—Eastland 2006, pet.
denied) (holding that flow line work, tank work,
and electrical work did not as a matter of law
constitute “drilling activities”).
Compare Petersen, 356 S.W.2d at 220
(holding site work, consisting of engaging a
drilling contractor, surveying, staking the well
location, and leveling the well location,
constituted commencement of operations) with
Veritas Energy, No. 13-06-061-CV, 2008 WL
384169, at *5–6 (holding that dirt work was not
sufficient to qualify as “commencing
See Geier-Jackson, Inc. v. James, 160 F.
Supp. 524, 527–28, 530 (E.D. Tex. 1958).
See BP Am. Prod. Co. v. Marshall, 288
S.W.3d 430, 450 (Tex. App.—San Antonio 2008,
pet. granted), rev’d by 342 S.W.3d 59 (Tex.
2011) (holding lessors’ fraud claims barred by
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activities may not legally qualify as
“commencement,” lessors typically have
difficulty learning the facts that would reveal
3. “Reworking.” Many continuous
drilling provisions permit “reworking” to be
one of the activities that will qualify as
continuous operations. The oil and gas
Pattern Jury Charges compiled by the
Texas State Bar’s Oil, Gas & Energy
define “reworking” as
“any and all actual acts, work, or operations
in which an ordinarily competent operator,
under the same or similar circumstances,
would engage in a good-faith effort to cause
a well or wells to produce oil or gas in
This language was drawn from Cox v.
Stowers, in which the Amarillo Court of
Appeals concluded that “the term ‘reworking
operations,’ . . . means any and all actual
acts, work or operations in which an
statute of limitations and/or adverse
The Pattern Jury Charges referenced are not
yet officially published by the State Bar of Texas.
See Oil and Gas Pattern Jury Questions and
Instructions, Oil, Gas & Energy Resource Law
Section of the State Bar of Texas, July 7, 2009,
es_20090707.pdf (last visited July 7, 2014). The
oil and gas Pattern Jury Charges are questions,
definitions, and instructions intended as a basic
template and written to apply what were
considered to be the most common fact patterns
found in cases arising in each of the substantive
areas treated. See Frequently Asked Questions:
Utilizing the Pattern Jury Charges for Oil and
Gas Cases, Jesse R. Pierce, 76 Tex. B.J. 327,
328 (Apr. 2013). Formalizing the oil and gas
Pattern Jury Charges has now been undertaken
by the State Bar’s official Pattern Jury Charge
Committee (of which the author is a member).
The Bar expects to release a draft for comment
in late 2014, with official publication slated for
Oil and Gas Pattern Jury Questions and
Instructions at 33. See also Bargsley, 196
S.W.3d at 827 (listing what might constitute
ordinarily competent operator, under the
same or similar circumstances, would
engage in a good faith effort to cause a well
or wells to produce oil or gas in paying
In Cox, the court of appeals
affirmed that “treatment activities”
undertaken to restore production—activities
that included lengthy waiting periods and
that in total lasted longer than a year—were
“reworking” efforts, and thus sufficient to
sustain the lease.
But another Amarillo
case required that to qualify as “reworking,”
the activities must be designed to change
the status of the well or to reequip it to
cause production to resume; thus, activities
such as cleaning up the well location did not
constitute “reworking” so as to satisfy the
continuous development provision.
In addition to requiring that reworking
operations be aimed at restoring production
in order to satisfy a continuous development
provision, courts have additionally required
that the reworking operations be conducted
in good faith. Thus, in BP America
Production Company v. Marshall, BP had
drilled a well but discovered that it was not
going to produce.
In an effort to comply
with the continuous development provision,
BP kept “reworking” the well for several
months until it could drill another well.
Ultimately, the court found that because BP
knew that its supposed “reworking” efforts
would be futile, those efforts did not qualify
as reworking operations under the
continuous development provision and did
not preserve the lease.
786 S.W.2d at 105.
Hydrocarbon Mgmt., 861 S.W.2d at 438.
BP Am. Prod. Co., 288 S.W.3d at 450.
Id. Although the Texas Supreme Court
reversed the case in part on other grounds, 342
S.W.3d 59 (Tex. 2011), the court of appeals’
analysis on the duty of good faith with respect to
operations under a continuous development
provision and its impact on lease termination is
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4. “Completion.” Most continuous
operations provisions trigger the period
between activities with “completion” of
operations on the prior well.
“Completion” can mean the date of total
or target depth; the date the rig is released;
the date it is cemented and cased; the date
the completion report is filed with the
Railroad Commission; the date that the
reservoir is perforated; the date fracking
operations are concluded so the shale well
is capable of production; or simply the date
work on the well is finished. Many of these
events are solely within the lessee’s control
and can be extended for quite some time or
at least can be difficult for a lessor to
Court guidance on interpreting these
terms is limited. One court has held that a
“well need not be a producing well to be
completed; it only needs to be capable of
producing oil or gas.”
Another court has
found that a well’s “completion” date was
the date of first cementing, not the later date
of drilling through cement and beginning
In Burns v. Louisiana Land &
Exploration Co., the Fifth Circuit interpreted
the phrase “completion of a dry hole.”
After finding no precedent, the court
determined the term to be indefinite and not
restricted only to drilling: “The context of the
specific use of the phrase ‘completion of a
dry hole’ in this lease leads us to conclude
that, in this sentence, completion of a dry
hole happens after unsuccessful drilling or
Exxon Corp. v. Emerald Oil & Gas Co., 348
S.W.3d 194, 212 (Tex. 2011).
See Modern Exploration, Inc. v. Maddison,
708 S.W.2d 872, 876 (Tex. App.—Corpus
Christi 1986, no writ) (drawing conclusion
despite recognizing that appellant likely waived
issue on appeal).
See Burns v. Louisiana Land & Exploration
Co., 870 F.2d 1016, 1018–19 (5th Cir. 1989).
Id. at 1021–22.
5. Timing ambiguities and
difficulties in counting days. When
do continuous development obligations
begin? Commonly, it is at the end of the
primary term. However, there may be
difficulties in determining the precise
expiration of the primary term. The
“begin date” may be unclear as to
whether it is the signing date, the
written-in date at the top of the lease
(which sometimes is not written in), or a
arise over the counting of days to
determine the end date: is the first day
counted, and is the last day counted? A
year could be 365 days, or the same
date the following year (especially
important to know in leap years). No
definitive case has yet decided these
issues, but the issue has been broached
in various commentaries and rules.
Although most continuous development
provisions become relevant only at the end
of the primary term, some require new
operations after the completion of the prior
well, even if it was completed during the
See, e.g., Stanolind Oil and Gas Co. v.
Newman Bros. Drilling Co., 305 S.W.2d 169,
174–75 (Tex. 1957) (signing date began primary
term); Community Bank of Raymore v.
Chesapeake Exploration, L.L.C., 416 S.W.3d
750, 756 (Tex. App.—El Paso 2013, no pet.)
(analyzing lease stating that primary term begins
on written-in date).
Compare 3 Williams & Meyers, Oil and Gas
Law § 606.2 (Abridged 4th ed.) (2010)
(discussing payment of delay rentals that are
due annually and stating that courts generally
hold that the expiration of a term of years occurs
“on or before the same date of the next ensuing
year, viz., if the lease is executed on June 1, the
rental will be due on or before June 1 of the
succeeding year”) with Texas Rules of Civil
Procedure 4 (“In computing any period of time . .
. the day of the act . . . after which the
designated period of time begins to run is not to
be included. The last day of the period so
computed is to be included . . . .”).
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In such a case, if the
continuous development provision requires
that a subsequent well be commenced
within 180 days after completion of the prior
one, and the prior one was completed more
than 180 days before the end of the primary
term, the ability to extend the lease past the
primary term will have already been lost
when the primary term expires.
Other continuous development
provisions do not trigger the provision if a
dry hole is drilled shortly before the
expiration of the primary term (thus leaving
the lessee with no production and no
“drilling or reworking operations” spanning
the end of the primary term).
continuous development provisions of this
nature, even though the parties may have
agreed that a specified number of days
between wells is a reasonable pace, the
lessee must meet the provision’s
requirements as the primary term is ending.
The effect may be directly contrary to the
intent of the provision to encourage drilling,
instead causing a lessee to delay drilling
near the end of the primary term so as to
ensure that the drilling activities are in
progress as the primary term ends.
B. Interaction with Other Lease Provisions
and Common-Law Doctrines
The intent and purpose of continuous
development provisions can be
unintentionally thwarted by interaction with
other provisions as well as common-law
doctrines such as the temporary cessation
doctrine and the implied duty to develop.
See, e.g., Gulf Prod. Co. v. Kishi, 105 S.W.2d
733, 735 (Tex. Civ. App.—Beaumont 1934, writ
See Humble Oil & Refining Co. v. Kunkel, 366
S.W.2d 236, 238–239 (Tex. Civ. App.—San
Antonio 1963, writ ref’d n.r.e.).
1. Lease Provisions
a. Shut-in Provisions
Shut-ins occur when a well has been
completed, but for one reason or another—
typically lack of a pipeline—the minerals
cannot yet be produced. Shut-in provisions
are a mechanism to allow the shut-in well to
be treated as though it were producing so
that the lease is preserved.
This can lead to results that may
surprise a lessor who was counting on the
lessee performing new drilling operations
every 180 days under a continuous
development provision. In Shell Oil Co. v.
Goodroe, a well was drilled and produced
during the primary term but was shut in after
the primary term expired. Because the shutin provision required the court to treat the
shut-in well as if it were producing, the court
permitted the lessee to tack the shut-in
provision and continuous development
provisions, thereby extending the term of
the lease with no production and no
Thus, since the
shut-in well was deemed to be “producing,”
there was no “cessation” to trigger the
continuous development obligations. In
effect, the time permitted for shut-ins was
tacked on to the time permitted for new
operations under the continuous
For that tacking to occur, however, the
shut-in must qualify as a shut-in, which
typically requires timely payment of shut-in
royalties. In Mayers v. Sanchez-O’Brien
Minerals Corporation, the court held that the
failure to pay shut-in royalties on time
invoked the sixty-day cessation-ofproduction clause.
Therefore, the lessee
had sixty days within which to begin actual
Shell Oil Co. v. Goodroe, 197 S.W.2d 395,
397–98 (Tex. Civ. App.—Texarkana 1946, writ
Mayers v. Sanchez-O’Brien Minerals Corp.,
670 S.W.2d 704, 709 (Tex. App.—San Antonio
1984, writ ref’d n.r.e.)
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production from the shut-in well or to begin
b. Severance Provisions (“Pugh”
A severance provision, commonly called
a “Pugh” clause, generally provides that
after the primary term, the lease lapses as
to all acreage (or sometimes, all depths)
except those either included in a producing
pool or surrounding a producing well on the
Such provisions can
provide incentive to fully develop acreage,
because they permit a lessor to solicit other
leases for the non-retained acreage.
leases that contain both Pugh clauses and
continuous development provisions can
create conflict if not addressed by language
in the lease. This is because at the
expiration of the primary term, the Pugh
clause automatically terminates the lease as
to the specified portions of the acreage, yet
the continuous drilling provision provides
that the lease does not lapse as long as
qualifying operations are conducted.
Such a conflict was addressed in
Massie v. Inexco Oil Co.
The lease in that
case contained both a continuous
development provision and a provision
terminating the lease as to all horizons not
being produced at the end of the primary
The Massie court solved the
apparent conflict between those provisions
by finding that if there was no production,
the lessee could rely on continuous
operations to maintain the entire lease, but
once there was production, the depth
severance would apply to terminate the
Community Bank of Raymore, 416 S.W.3d at
See El Paso Prod. Oil & Gas v. Texas State
Bank, No. 04-05-00673-CV, 2007 WL 752209,
at *5 (Tex. App.—San Antonio Mar. 14, 2007,
pet. denied) (mem. op.).
See Massie v. Inexco Oil Co., 614 F. Supp.
880, 880–81 (W.D. La. 1985), rev’d by 798 F.2d
777 (5th Cir. 1986).
Massie, 614 F. Supp. at 885.
remainder of the lease.
frustrated the lessor’s desire to obtain the
non-producing horizons at the end of the
primary term. Massie was later reversed by
the Fifth Circuit, which interpreted the
language at issue to mean the Pugh clause
would only apply after the continuous
development provision based on its
interpretation of the continuous
development provision as defining
continuous operations to be “production,”
thus precluding application of the Pugh
Although not a Texas case,
Massie serves as a warning that a
continuous development provision may
function differently than expected when
interpreted alongside a Pugh clause.
c. Pooling Provisions
The interaction between pooling
provisions and continuous development
provisions can also disappoint both lessors
and lessees. Lessors can find that the fulldevelopment goal of continuous
development provisions is circumvented by
off-lease development that holds the entire
lease. Indeed, even in the absence of
pooling provisions, some non-Texas courts
have held that efforts off the lease
performed with the good-faith attempt to
complete a well on the lease (such as slanthole well and horizontal completions) are
sufficient to sustain the lease even without
Although many continuous drilling
provisions address only activities occurring
“on” the leased premises, a pooling
provision will often permit activities on
pooled lands to count as activities on the
Massie v. Inexco Oil Co., 798 F.2d 777, 779–
80 (5th Cir. 1986).
See A&M Oil, Inc. v. Miller, 715 P.2d 1295,
1297 (Kan. Ct. App. 1986) (concerning slant
hole drilling); Manzano Oil Corp. v. Chesapeake
Operating, Inc., 178 F. Supp. 2d 1217, 1220 (D.
N.M. 2001) (finding A&M Oil instructive in
determining whether horizontal completions
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leased land. That was the case in Pioneer
Natural Resources USA, Inc. v. W.L. Ranch,
Inc., in which a lease addendum provided
that the lease would expire at the end of the
primary term if minerals were not being
produced or drilling activities were not
occurring “on the lease premises.”
Pointing out that addendums override
provisions in the main body of the lease, the
lessor argued that drilling on pooled lands
was not sufficient to maintain the lease.
The lessor lost, based on a pooling
provision indicating that operations
anywhere on lands pooled with the leased
lands shall constitute operations on the
On the other hand, lessees can
sometimes be misled by relying on activities
occurring on pooled lands to satisfy a
continuous development provision because
in order to be effective, pooling authority
must be express and it must be strictly
This was the problem in
Sunac Petroleum Corporation v. Parkes.
In Sunac, as the primary term expired, the
lessee began drilling an off-lease well on
Unfortunately for the lessee,
the well on the pooled land produced oil, not
Because the pooling provision
Pioneer Natural Res. USA, Inc. v. W.L.
Ranch, Inc., 127 S.W.3d 900, 905 (Tex. App.—
Corpus Christi 2004, pet. denied).
Id. at 905–6.
Id. See also Skelly Oil Co. v. Harris, 352
S.W.2d 950, 954 (Tex. 1962) (finding that
operations on a pooled tract satisfied a
continuous development provision and
maintained the lease). Skelly Oil is also
instructive as a lesson to carefully scrutinize
lease provisions when interpreting cases with
similar fact patterns. See id. at 952.
See Coastal Oil & Gas Corp. v. Garza Energy
Trust, 268 S.W.3d 1, 21 n.68 (Tex. 2008) (citing
Southeastern Pipeline Co. v. Tichacek, 997
S.W.2d 166, 170 (Tex. 1999)); Tittizer v. Union
Gas Corp., 171 S.W.3d 857, 860–1 (Tex. 2005)
Sunac Petroleum Corp. v. Parkes, 416
S.W.2d 798, 799 (Tex. 1967).
Id. at 799–800.
Id. at 800.
permitted pooling only for a gas well, the oil
well on the pooled lands did not qualify to
maintain the lease under the continuous
development provision and the lease
It is easy to see that strict
construction of pooling provisions can also
lead to failure to satisfy the continuous
development provision when the pooling
provision specifies merely that “production”
(instead of “drilling”) on pooled lands counts
as production on leased lands if the
development activities do not then result in
2. Common-Law and Implied Doctrines
a. Temporary-Cessation Doctrine
The temporary-cessation doctrine is a
doctrine implied by the courts to prevent a
lease from terminating even though
production has stopped if the cessation was
caused by mechanical breakdowns,
equipment theft, and similar events beyond
the control of the lessee.
If this doctrine is
applicable, once the lessor has established
that production has stopped, the burden
shifts to the lessee to prove the cessation
was temporary and due to sudden stoppage
of the well or some mechanical breakdown
of the equipment.
Due to the inherent
likelihood that every well will, at some point,
stop producing for some reason, the
temporary-cessation doctrine can save a
non-producing lease for any period of time
Id. at 801–02.
See Ernest E. Smith, Selected Works,
“Temporary Cessation of Production: The
Panhandle Cases” (2013) (originally published in
22 Petroleum Acct. & Mgmt. J. 1 (2003))
(discussing Scarborough v. New Domain Oil &
Gas Co., 276 S.W. 331, 331 (Tex. Civ. App.—El
Paso 1925, writ dism’d w.o.j.)).
Watson, 155 S.W.2d at 784; Midwest Oil
Corp., Inc. v. Winsauer, 323 S.W.2d 944, 947
(Tex. 1959); Krabbe v. Anadarko Petroleum
Corp., 46 S.W.3d 308, 315 (Tex. App.—Amarillo
2001, pet. denied) (citing Amoco Prod. Co. v.
Braslau, 561 S.W.2d 805, 809–10 (Tex. 1978)).
- 13 -
the court finds to be reasonable under the
As stated by Professor Ernest E. Smith,
the earliest clear expression of the
temporary-cessation doctrine in Texas
appears to be in Scarborough v. New
Domain Oil & Gas Co.
In that case, a gas
well had stopped producing but the operator
made various attempts to restore
In holding that the lease had
not terminated, the court stated:
[Where] the cause of
cessation of production was
unavoidable, and where the
lessees in good faith used
reasonable diligence to
resume production, and at a
great outlay of money, and
did, within a reasonable
time, in view of the
conditions disclosed by the
record, resume production,
a forfeiture for temporary of
cessation of production
without fault of lessees
should not be allowed as a
matter of law.
However, a standard doctrine of
contract interpretation holds that if a lease
contains an express provision addressing
an issue, that express provision will
supersede the implied doctrine dealing with
the same subject matter.
This rule of
contract interpretation can catch a lessee by
surprise because courts have held that
continuous development provisions, which
address how long a lessee has to take an
action after a cessation, will trump the
See Ridge Oil, 148 S.W.3d at 151-52;
Rochmill, 155 S.W.2d at 784.
Smith, supra note 65.
Scarborough, 276 S.W. at 333.
Id. at 331.
Yzaguirre v. KCS Res., Inc., 53 S.W.3d 368,
373 (Tex. 2001).
continuous development provisions override
implied duties may surprise those who
consider continuous development
provisions only as a saving mechanism and
not one defining and thereby limiting the
lessee’s obligations. For example, the court
in Samano v. Sun Oil Co. held that the
lease terminated because there had been
no operations to satisfy the continuous
operations provision, even though the
temporary-cessation doctrine would have
Similarly, in Sun Operating Limited
Partnership v. Holt, the court found that
because the lease expressed a time within
which drilling and reworking had to be
initiated once production ceased, the
temporary-cessation doctrine did not save
the lease when production ceased for more
than 60 days, no matter the cause of the
Thus, if a lease contains a continuous
drilling provision, a lessee must be aware of
and be prepared to comply precisely with
whatever type of activity is required if a well
stops production for any reason after the
primary term. It is entirely possible that
See Amoco Prod. Co. v. Braslau, 561 S.W.2d
805, 808 (Tex. 1978) (discussing and approving
Holchak v. Clark, 284 S.W.2d 399 (Tex. Civ.
App.—San Antonio 1955, writ ref’d) for the
proposition that the temporary cessation
doctrine applies only in absence of continuous
drilling clause). Note that continuous
development provisions should also trump the
implied duty to reasonably develop the lease
because the continuous development provision
addresses what and when certain kinds of
development activities must occur. See Jones v.
Thompson, 338 S.W.3d 573, 584 (Tex. App.—El
Paso 2010, pet. denied) (noting that “[t]he duty
to develop a mineral lease arises from the
implied covenant doctrine of contract law . . . .”).
See also Krabbe, 46 S.W.3d at 315.
Samano v. Sun Oil Co., 621 S.W.2d 580, 584
Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d
277, 282 (Tex. App.—Amarillo 1998, pet.
- 14 -
simply fixing the well will not suffice and the
lease might lapse.
This concept was used to the lessee’s
benefit in Stroud Prod., L.L.C. v. Hosford.
In Stroud, the lessee had entered into a
lease whereby the lessor was to earn an
overriding royalty interest in any oil and gas
produced from the leases.
were ultimately assigned and the
assignments did not include renewal and
extensions clauses that would have
protected the overriding royalty interests.
A few days after the lessee discovered that
the assignments did not include renewals
and extensions clauses, a rod broke on the
Even though the cost of repair would
have been reasonable and would have
resulted in the production of oil in paying
quantities after only a temporary cessation,
the lessee intentionally did not repair the
well so as to wait out expiration of the
continuous development period, thereby
causing lease termination.
Once the lease
terminated because of failure to comply with
the continuous development provision, a
new lease without overriding royalty
interests was negotiated on the same tract
b. Implied Duty of Good Faith
For non-oil and gas contracts, Texas
courts do not imply a general obligation of
Contrary to that general rule of
contracts, in the context of oil and gas
leases and the contractual obligations
contained in those leases, courts
consistently approve jury charges that
Stroud Prod., L.L.C. v. Hosford, 405 S.W.3d
794, 799–800 (Tex. App.—Houston [1st Dist.]
2013, pet. denied).
Id. at 798.
Id. at 799.
Id. at 799–800.
See Subaru of Am., Inc. v. David McDavid
Nissan, Inc., 84 S.W.3d 212, 225 (Tex. 2002); El
Paso Natural Gas Co. v. Mino Oil & Gas, Inc. 8
S.W.3d 309, 312–13 (Tex. 1999).
impose good faith and “prudent operator”
standards on lessee’s activities, even when
not explicit in the provision. Thus the implied
duty of good faith is also applied to whether
an operator has complied with a continuous
In Texas Pacific Coal & Oil Co. v.
Barker, the Texas Supreme Court
addressed the issue of the requisite level of
care with respect to continuous
development operations, even though the
lease did not specify good faith.
stated that “the contract being silent as to
the care with which such operations should
be carried on, the law required same to be
conducted with reasonable care, that is,
with ordinary care.”
Implying that the parties intended there
be “good faith” in conducting activities does
have benefits such as protecting against
lessees attempting to comply with
continuous development provisions in name
only. One example of this is when a lessee
knowingly uses a drilling rig that is not
capable of reaching the depth required to hit
a productive strata (typically referred to as
simply “punching holes”), or reworks a
known dry hole to buy time.
The negative side of imposing a goodfaith gloss to operations is that determining
good faith is a fact-intensive battle that can
require years of litigation to resolve. For
example, in Sauder v. Mid-Continent
Petroleum Corporation, the United States
Supreme Court held that, “whether or not in
any particular instance such diligence is
exercised depends upon a variety of
circumstances . . . Whatever, in the
circumstances, would be reasonably
See, e.g., Rogers, 261 S.W.2d at 314; Cox,
786 S.W.2d at 105.
Texas Pacific Coal & Oil Co. v. Barker, 6
S.W.2d 1031, 1035–36 (Tex. 1928).
Id. at 1035.
See BP Am. Prod. Co., 342 S.W.2d at 67
(discussing BP’s bad faith efforts to “rework” a
well it knew would not produce in order to keep
the lease in force).
- 15 -
expected of operators of ordinary prudence,
having regard to the interests of both lessor
and lessee, is what is required.”
IV. Difficulties with What Happens After
the Continuous Development
Most continuous development
provisions contain a “retained acreage”
provision that permits the lessee to keep
certain lands when continuous development
stops. Like the continuous development
provision itself, the retained acreage
provision is rife with possible ambiguities
that can lead to expensive litigation.
For example, many retained acreage
clauses provide that the lessee will keep the
“unit” around each producing well. “Unit”
can mean “drilling unit,” which is “[t]he
acreage assigned to a well for drilling
But designation of a drilling
unit is no longer required on vertical wells,
leaving lessors and lessees little guidance
as to what acreage would be retained for
“Unit” can also mean “proration unit,”
which is the acreage assigned to a well for
the purpose of determining production
Allowables are determined by
the formula the Railroad Commission uses
in an effort to “prevent waste” (trapped
hydrocarbons) and “protect correlative
rights” (keep one producer from unfairly
draining another’s lands).
many fields, the “allowable” concept has
again wreaking havoc
with retained acreages that are defined by
Sauder v. Mid-Continent Petroleum Corp., 292
U.S. 272, 280 (1934) (quoting Brewster v.
Lanyon Zinc Co., 140 F. 801, 814 (8th Cir.
16 Tex. Admin. Code §3.38(a)(2).
See id. at § 3.5(h).
Id. at § 3.38(a)(3).
Id. at §§ 3.31, 3.45.
Id. at § 3.31(j).
The word “unit” may also refer to a
“pooled unit,” the pool formed by joining
separately owned tracts.
Pooled units can
be reflected in the P-12 filed with the
Railroad Commission, or sometimes a
Pooled Unit Declaration filed at the
courthouse. Yet those pool descriptions can
be different and can often be changed at the
whim of the lessee.
Sometimes the retained acreage clause
attempts to avoid the above ambiguities and
specifies the acreage required to comply
with the Railroad Commission spacing and
Most leases, however, do
not consider that different spacing and
density rules are applicable to different
locations and that the rules can change over
time. In addition, older leases and new
leases copied from older leases still run into
the “prescribed or permitted” problem
encountered in Jones v. Killingsworth.
that case, the retained acreage was defined
as the amount “prescribed or permitted” by
the Railroad Commission, with the obvious
intent that the amount of retained acreage
would be increased to the amount the
Railroad Commission would permit.
However, the specific language used in the
lease stated “that should governmental
authority having jurisdiction prescribe or
permit the creation of units larger than those
specified, units thereafter may conform
substantially in size with those prescribed
by governmental regulations.”
the part of the sentence specifying the
actual size of the unit said only that the unit
could be that “prescribed” by the
governmental regulation, and did not repeat
the word “permitted,” the court limited the
See, e.g., Wagner & Brown, Ltd. v. Sheppard,
282 S.W.3d 419, 421 (Tex. 2008) (discussing
pooling accomplished with “unit agreements”
signed by owners of separately owned tracts).
See 16 Tex. Admin. Code § 3.37.
Jones v. Killingsworth, 403 S.W.2d 325, 327
Id. at 326–27.
Id. at 327.
- 16 -
size of the unit to the smaller of that
prescribed or permitted.
Another frequently encountered problem
with retained acreage clauses is when they
define different acreages depending on
whether the well is a gas or oil well. The
Railroad Commission defines the difference
by the gas-to-oil ratio, which is 2000 cubic
feet of gas per barrel of oil produced.
a “gas” or “oil” designation is not set in
stone. It is not uncommon for gas wells to
eventually produce less than 2000 cubic
feet of gas and be reclassified as an oil well.
Since virtually all retained acreage clauses
differ by whether the well is classified as an
oil or gas well, if the well changes to an oil
well, the retained acreage will drop from the
common 320 acres for a gas well to 40
acres for an oil well, forcing the release of
that additional acreage.
On the other side, consider what
happens if at the end of the continuous
development activities, the lessee has an oil
well, and so must release all acreage
except the 40 acres surrounding it.
Sometime later, the well begins producing
so much more gas than oil, that it is
reclassified as a gas well, but it is too late:
the operator has only 40 acres, which is not
enough for a gas well. That is precisely
what happened in Hunt Oil Co. v. H.E.
In addition to the problems above,
retained acreage clauses that use language
such as “100 acres around” a well fail to
16 Tex. Admin. Code § 3.49(a).
Hunt Oil Co. v. H.E. Dishman, 352 S.W.2d
760, 764 (Tex. Civ. App.—Beaumont 1961, writ
ref’d n.r.e.) (holding that Hunt lost its right to the
320 acres and kept only the 40 acres allocated
to a well reclassified from a gas well to an oil
well, and rejecting argument that a well holding
40 acres could later hold 320 acres if it became
a gas well).
describe what land will be retained
sufficiently to satisfy the statute of frauds.
Finally, retained acreage clauses
frequently fail to address what happens if
the “units” around the producing wells do
not touch. It is black-letter law that a mineral
lessee has the right of ingress and egress
on the surface of the leased tract; but when
those leased tracts are separated by
unleased lands, or are isolated in the middle
of unleased lands, the mineral lessee will
not have access to its tracts without
separately negotiated easements.
The continuous development provision
can and should be a powerful savings
clause in a lease, but careful attention to
drafting, and then careful attention to its
application, is paramount if its power is to
be realized and litigation avoided.
May v. Buck, 375 S.W.3d 568, 572, 576 (Tex.
App.—Dallas 2012, no pet.) (finding that “100
acres around” is not a sufficient description); but
see Tiller v. Fields, 301 S.W.2d 185, 189–90
(Tex. Civ. App.—Texarkana 1957, no writ)
(holding that a description is acceptable if one
party is allowed to choose).
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